Ottawa cites housing risk for imposing fee on CMHC's mortgage insurance program

OTTAWA – The federal government is imposing a “risk fee” on CMHC for new issuances of high-risk mortgages starting next year — a fresh indication that Finance Minister Jim Flaherty is unhappy with the risk to taxpayers posed by Canada’s hot housing market.

The fees of 3.25 per cent applied to the Canada Mortgage and Housing Corp. on new premiums written, as well as a charge of 10 basis points on new portfolio insurance, is expected to cost the housing agency about $50 million a year.

However, officials said that at present there are no plans to pass on the costs to Canadians obtaining mortgage insurance.

“We certainly don’t expect it to have any impact on the availability or cost of mortgage funding,” CMHC chief financial officer Brian Naish said. “We don’t see it as a material event.”

The news was contained in CMHC’s third-quarter report released Friday showing the agency has actually reduced its risk and earned more income so far this year due, in part, to improving economic conditions and tighter lending rules.

A Finance Department email statement said the fees “compensate the government for risks stemming from its guarantee of mortgage insurance.”

Since the beginning of this year, private sector mortgage insurances have been paying Ottawa a 2.25 per cent fee, but the CMHC charge will be greater because the government backs 100 per cent of mortgages it insures. Private insurers only guarantee 90 per cent.

Earlier in the week, the International Monetary Fund recommended that the government consider phasing out CMHC’s role in insuring mortgages, arguing that the government guarantee encouraged activity in the housing market.

Flaherty has also mused about the issue, pointing out that originally CMHC was intended to support social housing but had, over the years, morphed into a financial behemoth.

The minister has also voiced concern that the government-backed insurance that CMHC issues exposes taxpayers to risk should a shock or housing collapse occur. All homes purchased with less than 20 per cent equity must carry mortgage insurance.

In its quarterly report Friday, the agency said its total portfolio of insured mortgages dropped by $6 billion to $560 billion at the end of the third quarter, adding distance from the legal limit of $600 billion.

Meanwhile, net income the first nine months of this year rose 11 per cent to $1.3 billion, mainly because of lower claims. For the quarter in isolation, net income rose 20 per cent to $452 million.

While insurance volumes picked up in the third quarter, for the year to date total volumes declined 14 per cent over the same period last year, the agency said.

“The year-to-date decline is attributed to the reduced size of the high-ratio homeowner mortgage loan insurance market as a result of the new mortgage insurance parameters that took effect in July 2012 and to lower portfolio insurance volumes compared to the same period in 2012,” CMHC said in a release.

The agency’s third-quarter report suggests that at present the risk is very low despite what economists perceive to be an overheated and overpriced market.

The CMHC said the average credit score for high-ratio homeowner approved loans actually improved to 741 in the first nine months of this year compared with 737 in the same period in 2012.

“The high average credit score demonstrates a strong ability among homebuyers with CMHC-insured mortgages to manage their debts,” the agency said.

“The strength of CMHC’s mortgage insurance portfolio is further demonstrated by the overall arrears rate of 0.33 per cent at Sept. 30, 2013,” it added, a shade higher than at the end of the second quarter but a 0.02 percentage point improvement compared with the year-end 2012.

Based on updated property values, CMHC said three quarters of the mortgages it has insured have loan-to-value ratios of 80 per cent or less.